Jeremy Corbyn successfully passed his first electoral test with flying colours but Ukip complained of a "bent" contest after failing to make the breakthrough Nigel Farage hoped for.
Jim McMahon held the seat for Labour with a majority of more than 10,000 and an increased share of the vote, which will provide some relief to Mr Corbyn after a torrid week for his leadership following bitter in-fighting over air strikes in Syria.
The Labour leader hailed the result as a "vote of confidence in our party" while Ukip claimed the volume of postal votes cast in the constituency had "distorted" the outcome.
Turnout was higher than expected at just over 40%, and Labour's success appears to have been partly secured by an effective postal vote operation.
Mr Farage said: "As a veteran of over 30 by-elections I have never seen such a perverse result. Serious questions need to be asked."
The Ukip leader claimed to have "evidence from an impeccable source that today's postal voting was bent".
Mr McMahon polled 17,209 votes, with Ukip's John Bickley trailing in second on 6,487, a majority of 10,722.
Labour's share of the vote increased by more than seven points to 62.1% and there was a 2.27% swing from Ukip to Labour.
Last October Mr Bickley nearly overturned an 11,000 Labour majority at the Heywood and Middleton by-election, losing by just 600 votes.
He said Oldham West and Royton was a "different type of constituency with different demographics" in a "very strong Labour heartland".
He claimed the postal voting system was "not fit for democracy right now", while Ukip's deputy leader Paul Nuttall said postal votes had "distorted the result" amid claims Labour had focused on the Asian community with an alleged surge in postal ballots yesterday.
Mr Nuttall said: "We should go back to the old system where you had to give a good reason why you can't get off your backside and go down to a polling booth. That would make it fair again. That would make polling day actually mean something."
Mr McMahon, the leader of Oldham Council, dismissed Mr Farage's accusations of a "bent" contest, saying: "There is nothing wrong with people making a democratic decision not to support Ukip."
Westminster's newest MP said he was "delighted" by the result and vowed to "do my best to live up to those high standards" set by Mr Meacher.
Mr McMahon said: "My sole focus has always been on what is best for Oldham, I want to make our town a better place for my sons to grow up in and make it somewhere they can be proud of, my priority will always be Oldham.
"We also need to remember what is currently at stake under this Tory government. While everyone is looking the other way they are quietly pushing through cuts that will change the face of towns like Oldham.
"The sooner we kick the Tories out and get a Labour government back in, the better for all of us. The hard work starts now."
Mr Corbyn said: "By-elections can be difficult for the party holding the seat, and turnouts are often low. But to increase our share of the vote since the general election is a vote of confidence in our party.
"It's a clear demonstration that Labour is the party working people trust.
"Our determination to oppose Tory austerity policies, and our successes in pushing them back on tax credit and police cuts show that Labour is getting results for working people.
"With the Tories going nowhere in Oldham, Ukip has benefited from a protest vote. But this first electoral test in the new parliament has made clear Labour is the real alternative for Britain."
Tory James Daly was third with 2,596, 9.37% of the vote, while the Liberal Democrats lost their deposit after Jane Brophy secured 1,024 votes, a 3.7% share.